Trends suggest that regulatory issues (like DOL) played a part, along with some fallout from the RCAP-Schorsch debacle.

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W. P. Carey (WPC) said Thursday that it will cease new non-traded REIT activities, now carried out by Carey Financial. Instead, the company will focus on net-lease real estate investing.

“W. P. Carey’s management and board of directors believe this approach will create long-term value for shareholder by enhancing its ability to grow adjusted funds from operations (AFFO) through a combination of single-asset investments and portfolio acquisitions,” it said in a press release.

New non-traded (or private) REIT programs will end June 30, while exiting program will continue until their investment cycle is over. The firm hopes to save costs by eliminating its retail fundraising platform and says it “remains well-positioned to potentially acquire the net lease assets currently owned by the CPAREITs, which it has acquired and managed on their behalf.”

The company says it now has an enterprise value of about $10.7 billion. On Friday, its market capitalization was roughly $7.24 billion.

In addition to its global real-estate portfolio, W.P. Carey’s non-traded publicly-registered and private investment programs have assets under management of some $13.0 billion.

“We looked closely at the potential structures for new products such as CPA:19–Global, including the types of investments that would satisfy their liquidity and leverage needs, and the time and scale required for them to reach profitability. Our conclusion was that our shareholders would be better served by focusing on our core net lease investment expertise,” CEO Mark J. DeCesaris explained in a statement.

The company said on Thursday that it does not expect this decision to “impact its 2017 guidance range and in conjunction with this announcement is affirming that for the full year it expects to report AFFO of between $5.10 and $5.30 per diluted share, subject to previously disclosed assumptions.”

Schorsch Debacle

“You can only get away with selling poison for so long, before you’re unable to replace your dead customers with new ones,” wrote Josh Brown of Ritholtz Wealth Management in a blog about the declining sales of non-traded REITs a year ago.

Advisors who sell non-traded REITs traditionally have received a 7% commission, while the firm gets a 3% selling concession—“the very opposite of a fiduciary,” according to Brown.

As tracked Robert A. Stanger & Co., non-traded REIT fundraising was about $1.5 billion in January 2015, but was roughly $380 million in January 2016 and $114 million in May 2016.

In addition to the impact on sales from regulations such as the Department of Labor’s new fiduciary standard, which went into effect June 9, and other industry shifts that have taken place in anticipation of DOL, there also is likely to have been some fallout from the RCS Capital’s bankruptcy announcement of Jan. 31, 2016.

At the time, RCS Capital—or RCAP—said it was “winding down” the troubled wholesale-distribution business of Realty Capital Securities, which included nontraded REIT sales via advisors and broker-dealers.

These developments occurred several months after RCAP board member Edward Michael Weil resigned; earlier, he had served as CEO of the firm, as well as president, treasurer, secretary and director. In addition, he had leadership roles at American Realty Capital Properties, or ARCP, and of nontraded REITs sponsored by AR Capital.

The entwined entities — founded by real estate mogul Nicholas Schorsch — came under intense scrutiny after ARCP reported $23 million in accounting errors in October 2014; more recently, a deal to sell some of RCS Capital’s assets fell apart when Apollo Global Management cancelled the transaction.

RCS Capital then decided to shutter Realty Capital Securities and agreed to pay $3 million to the state of Massachusetts to settle charges tied to alleged fraudulent proxy-voting schemes in late 2015.

That news followed a decision by Moody’s Investors Service to downgrade RCAP’s credit ratings on $750 million of debt. The downgrades reflected “RCS’ diminished ability to satisfy its debt load from its ongoing activities, and also the risk that it may not be able to attract a sufficient and timely amount of new investment that is necessary to fully protect creditors’ interests, as it seeks to recapitalize its balance sheet,” Moody’s explained in a statement at the time.

According to Moody’s, RCS Capital had a total of $850 million in debt and $300 million in preferred equity in 2015. It bought Realty Capital Securities for $1.15 billion in early 2014.

Massachusetts’ regulators charged registered representatives of Realty Capital Securities with impersonating shareholders and casting proxy votes in favor of management proposals at meetings of an investment program sponsored by American Realty Capital, a company owned by Schorsch and William Kahane that manages nontraded REITs.

ARCP’s ex-CFO Brian Block is now on trial in New York for securities fraud.

(After RCS Capital went public in June 2013, it went on a buying spree — gobbling up broker-dealers such as First Allied, The Legend Group, Investor’s Capital, Cetera Financial Group, Summit Financial, J.P. Turner and others. These BDs were spun off from the troubled entity in early 2016 under the leadership of Larry Roth, and now operate as part of Cetera Financial; they are now led by Robert Moore, a former executive of LPL Financial, which has made headlines over the years for compliance woes tied to nontraded REIT sales.)

Janet Levaux

Janet Levaux, MA/MBA, is Editor in Chief of "Investment Advisor" magazine; she has covered the financial markets since 1991 and advisors since 2005.

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